Investment Biases: Hurricanes & Munger

Hurricanes

Hurricanes and Charles T. Munger

June is the start of the North American hurricane season. So why did I reference the hurricane season? Not because of its impact on insurance rates, although we do follow them because costly years can affect the price of coverage the following year for property owners. I bring it up because I read an article citing a fascinating study which has some application to investing and the biases to which we’re all susceptible. Investment biases can be quite detrimental to one’s financial health so we should do all we can to know when we’re falling prey to them. The headline of the article is as follows:

‘Female’ hurricanes cause more deaths, but only because people don’t take them seriously

Gender stereotypes affect the perceived threat of incoming storms

After researching hurricanes and their human impact over sixty years of events (exclusive of Hurricane Audrey in 1957 and Katrina in 2005), the authors calculated that on average severe hurricanes with male names resulted in 15 deaths while those with female names caused 42 deaths. The researchers hypothesize that the higher average death toll is because people did not take female-named hurricanes as seriously as male ones. They did follow up experiments with people to assess their threat perceptions and were able to discern that those in the study perceived a greater threat from storms with male names as compared to female-named ones. I highly recommend reading some of the comments, they’re hilarious. For example, one person suggested that naming it Hurricane Lorena Bobbitt would result in a mass evacuation, particularly among men.

By the way, the first hurricane of the season is expected to hit the Outer Banks of North Carolina on July 4. Its name is Arthur.

From an investment standpoint, this is kind of an interesting study. Often times investors don’t perceive threats strongly enough for many types of reasons. Charlie Munger has thought long and hard about such biases and he gave a great speech about some of the major causes of human misjudgment. It can be found in Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger which is unquestionably one of the best books an investor could ever read. I’ve written about this in a previous newsletter to our CWS investors but I thought it would be highly relevant to dust off some of the ones I thought were germane to this post. And given everything going on the Middle East, it’s actually quite applicable to the mindset of some of the religious fanaticism that we’re witnessing there.

Liking-Loving Tendency

“Makes the liker or lover tend (1) to ignore faults of, and comply with wishes of the object of his affection, (2) to favor people, products, and actions merely associated with the object of his affection, and (3) to distort other facts to facilitate love.”

I would put this in the category of “you see what you want to see.” This enables investors to be swayed by people and investments they like. For example, many of our investors had great success in manufactured housing investments and for awhile they wanted to have more of these opportunities available. Nevertheless, the risks of the business for family communities increased dramatically since we exited it, and these investments needed to be assessed very differently. This tendency should not get in the way of objectively assessing the risk/reward trade-off.

Disliking/Hating Tendency “Makes the disliker/hater tend (1) to ignore virtues in the object of dislike, (2) dislike people, products, and actions merely associated with the object of his dislike, and (3) distort other facts to facilitate hatred.”

You see what you want to see, and this can result in investors passing on good opportunities for which they have negative past associations or experiences. We faced very challenging circumstances in our Denver apartment investments in the early to mid-2000s, but the dislike for Denver should not have gotten in the way of objectively analyzing whether now might be a good time to purchase additional assets there.  Denver has actually been phenomenal for the last four years and we’re still optimistic about its prospects.

Doubt-Avoidance Tendency

“The brain of man is programmed with a tendency to quickly remove doubt by reaching some decision…[I]t is logical to believe that at least some leaps of religious faith are greatly boosted by this tendency…[W]hat usually triggers Doubt-Avoidance Tendency is some combination of (1) puzzlement and (2) stress. And both of these factors naturally occur in facing religious issues.  Thus, the natural state of most men is in some form of religion. And this is what we observe.”

Confusion and stress create a desire for certainty, simplicity, and to be shown the way. This can lead to blind faith in investing and make people susceptible to religious fanaticism.

Inconsistency-Avoidance Tendency

“The brain of man conserves programming space by being reluctant to change, which is a form of inconsistency avoidance…[P]ractically everyone has a great many bad habits he has long maintained despite their being known as bad…We all deal much with others whom we correctly diagnose as imprisoned in poor conclusions that are maintained by mental habits they formed early and will carry to their graves…And so, people tend to accumulate large mental holdings of fixed conclusions and attitudes that are not often reexamined or changed, even though there is plenty of good evidence that they are wrong.”

Never let facts get in the way of what you want to believe. This is very dangerous for investing and can make the “true believer” incapable of seeing another point of view no matter how sound the logic and supporting evidence.

Curiosity Tendency

“Curiosity, enhanced by the best of modern education, much helps man to prevent or reduce bad consequences arising from other psychological tendencies. The curious are also provided with much fun and wisdom long after formal education has ended.”

To quote physicist Richard Feynman, “Everything is interesting as long as you look deep enough.” Those unwilling to explore things more deeply will be susceptible to surface-level manipulation.

Reciprocation Tendency

“The automatic tendency of humans to reciprocate both favors and disfavors has long been noticed as extreme, as it is in apes, monkeys, dogs, and many less cognitively gifted animals. The tendency clearly facilitates group cooperation for the benefit of members…What both human and ant history suggest is (1) that nature has no general algorithm making intra-species turn-the-other-cheek behavior a boost of species survival, (2) that it is not clear that a country would have good prospects were it to abandon all reciprocate-disfavor tendency directed at outsiders, and (3) if turn-the-other-cheek behavior is a good idea for a country as it deals with outsiders, man’s culture is going to have to do a lot of heavy lifting because his genes won’t be of much help.”

Be cautious of nice acts from individuals who want something from you because you will probably feel better about that person and want to reciprocate. On a more Machiavellian level, however, the converse of this tendency – vicious behavior to those outside the group – is part of the genetic makeup of many societies, and we should not expect nice things from other countries even if we carry out selfless acts of kindness.

Simple, Pain-Avoiding Psychological Denial

“The reality is too painful to bear, so one distorts the facts until they become bearable.”

Denial is a dangerous tendency. It’s another example of not dealing with “what is”, and can lead to very destructive behavior. People are loath to sell poor investments when they have a paper loss even though their money may be better off in another investment. This is a form of denial.

Excessive Self-Regard Tendency

“Some of the worst consequences in modern life come when dysfunctional groups of cliquish persons, dominated by Excessive Self-Regard Tendency, select as new members of their organization’s persons who are very much like themselves…Therefore, some of the most useful members of our civilization are those who are willing to “clean house” when they find a mess under their ambit of control…Excesses of self-regard often cause bad hiring decisions because employers grossly over appraise the worth of their own conclusions that rely on impressions in face-to-face contact. The correct antidote to this sort of folly is to underweigh face-to-face impressions and overweigh the applicant’s past record.”

Investors may end up putting their money with people they like as opposed to those who offer the soundest advice.

Stay safe and remember, female hurricanes can be just as deadly as male ones! Check your biases at the door.


2 comments on “Investment Biases: Hurricanes & Munger
  1. Pete Jantz says:

    Gary,

    Excellent presentation. Many of us have read along similar lines but fail to really practice that which we understand (when we think about it).

    Every time someone like you presents the material it brings out aspects not previously known or understood so you do a tremendous service for others.

    Unfortunately, far too great a percentage of the population will not read what you wrote or their eyes would turn glassy if they did.

    The old farmer put it this way, “You can lead a horse to water but you can’t make him drink.”

    Keep up your good work.

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